Do bans have regulatory value?

After over 10 years of working with governments across South Asia on regulatory reform, I’ve recently started wondering whether our regulatory frameworks are underpinned in any way by logic. This line of thinking emerged from my own personal experience with a few relatively draconian regulatory processes for expatriates in India – as a user of these regulations, I felt I was beaten into a state of compliant subjugation, rather than getting any personal value out of the process. Afterwards, though, I kept asking myself whether the government or society benefited or derived any value from the regulation itself.

This line of thinking emerged coincidentally around the same time as the India federal and state government’s on-again, off-again attempts to ban services like Uber. The underlying events that triggered these efforts are certainly tragic, and there is no doubt that the problem needs to be addressed. Given the heightened emotion around rape in India, a ban might seem to be a good immediate regulatory instrument that can be popular. But a long-term ban on these services is problematic in itself.

Do Bans Work?

A ban, theoretically, should be used to prohibit undesirable behaviors. But their application and success is limited, as far as I can see.

On a recent visit to Bhutan, I finally discovered the office’s underground smoking room. Previous visits have involved a lot of suspicious sneaking around in an attempt to avoid offending anyone with my grotesque behavior in the only country in the world to have banned smoking and the sale of cigarettes. This time, however, I figured out that I needn’t have bothered with all the subterfuge. The smoking room is incessantly surrounded by a haze of cigarette smoke – coming primarily from Bhutanese chain-smokers that seem to treat the room as a second home.

I learned from these smokers that cigarettes are surprisingly still widely available – it’s just that buying and selling them requires a level of caution and discretion that wasn’t needed before the prohibition came into place. This isn’t surprising – the last attempt to impose a wide ban on an addictive substance failed spectacularly. Bans on products generally have one concrete outcome – the development of a strong thriving black market, particularly if enforcement is weak.

So why ban anyway?

Bans on cigarettes and alcohol consumption and sale arise from attempts by governments to cull behaviors they consider as bad, and particularly to improve public health outcomes. However, a ban on the product itself represents a gross over-simplification of the health outcomes that they intend to target. Smoking and drinking affect not only the user’s health, but, through second-hand smoke and negative behaviors from alcohol use, the health of others in the wider community. Plus alcohol and cigarette consumption by minors can greatly impact their long-term health.

Therefore, bans that target these undesirable behaviors work better than outright bans on the product – banning underage consumption, smoking in public places and driving under the influence works better than banning the product altogether. Also, it’s easier to enforce – rather than trying to find every single member of the thriving black market, it’s easier to find people demonstrating the behaviors you want to avoid and penalize them.

Extending these lessons to non-addictive goods

But we all know that the economics of addictive substances are significantly different from the markets for taxi services, which have demand and supply trends consistent with other goods and services. And therein lies the first problem – banning Uber first and foremost is a regulatory control on the market for taxi services.

The fact that Uber exists in South Asia, where taxi services are still a luxury for most, shows that a sizeable market clearly exists and, furthermore, that the current taxi service model is not working. The market failure is due to both demand and supply failures. There is tremendous demand for services like Uber from consumers – on weekdays, surge pricing has become common at rush hour, indicating high consumer demand. Several drivers I have spoken to also prefer using Uber with their cars, because it pays better than regular assignments.

So both demand and supply for such services exist – therefore, banning Uber means sacrificing both consumer and provider utility, by reducing supply in a market where the existing supply of taxi services does not sufficiently meet the existing demand. For the ban to be successful, therefore, the Government simultaneously needs to address the supply deficiency by providing alternative supply to consumers.

Without such increased supply, a “black market” will emerge in the short term – just because Uber is banned from providing the service does not mean that consumers will not suddenly need to commute, and that drivers will want to give up the increased earnings they earned through Uber.

A black market is also more difficult for governments to regulate and enforce. In the short term, a ban will only lead to the development of informal and therefore unregulatable alternatives. In the medium term companies like Uber, which pride themselves on being disruptive, will find loopholes in regulations to allow them to reintroduce services through some other mechanism. In the long term, therefore, the Government will find itself with a host of informal and semiformal alternatives to regulate, instead of the few known brands that currently provide the services.

Public safety only compounds the underlying economic problem

There is no doubt that the government must eliminate rape – it is a heinous, despicable act, and it should definitely be a major priority of the government. And not just in India, where the media has generated such awareness, but also all over South Asia, where chauvinistic mindsets prevail and manifest themselves through such violent acts on a regular basis, but where such stories are not as widely known due to social stigmas and under-reporting.

Banning Uber however is an attempt to eliminate only one insubstantial opportunity to rape. The fundamental problem the Government is trying to address is that Uber and related services do not sufficiently check the backgrounds of the drivers that provide services. A ban will not eliminate this problem, however – the black market that will emerge in the short term will introduce many more informal alternatives that will most likely include even fewer public safety safeguards. Therefore, a ban will not reduce the opportunities for rape, but rather might very well increase them in the medium term.

Further, the inherent assumption behind banning Uber seems to be that the status quo situation of the taxi service market provides adequate safeguards to prevent rape. Therefore, in theory, consumers should be happy with sacrificing the utility they gain from Uber in the interest of protecting their safety by restricting supply to existing formal taxi providers. Recent events have shown quite clearly that this is patently not the case.

So what can the Government do anyway?

This post does not seek to prescribe regulatory instruments to combat rape – this requires much greater research and analysis than I am capable of. It is a societal problem that requires a coordinated societal solution – starting with addressing stigmas, mindsets, cultures, education and a whole host of other factor. Rather, this post focuses on microeconomics – regulatory tools that can ensure an effective market for taxi services while safeguarding public health and safety.

So what can the government do? One solution that negates the need for a black market is to replace Uber and associated services with a Government-owned and operated service that provides exactly the same service while incorporating stronger and stricter safeguards on drivers to ensure increased public safety. Alternatively, they can roll out more cabs with drivers who have undergone stringent verification. But both of these are expensive drains on public resources which could be better spent on addressing the constituent societal influences that make rape so prevalent in the first place.

Instead, the government could much more easily and effectively engage the industry – Uber, Ola and other such services that are emerging – and agree a stringent set of safeguards and checks that the companies must implement to ensure that the drivers are fully vetted to provide taxi services through these apps. This has the added benefit of attributing responsibility for any such future acts to the companies themselves – if such an event in the future happens because the companies did not comply, the company is also directly liable. Such efforts will in the short term constrain supply a little as existing drivers are vetted through the process, but this is a short term loss of utility that both consumers and providers will be happy to take on in the interest of protecting their own safety.

It is therefore good to see that cooler heads have prevailed at the central government level. This not only indicates to me that governments still consider economic principles before rushing to regulatory decisions, but also reassures me that there is still some logic left in policy-making. It also demonstrates that governments are slowly waking up to the challenges of regulating innovation – as we move further into the 21st century, governments need to move towards proactive regulation that evolves along with technology and move away from reactive regulation that penalizes innovation and technology adoption by bringing them under the framework of already-obsolete laws and regulations. This will allow governments to facilitate innovation, instead of regulating it. And, at the end of the day, ensure regulations indeed have value for society as a whole.